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Reduction Is Theme Of President’s Next Act

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Reduction Is Theme Of President’s Next Act

April 18, 2010 10:37 pmApril 18, 2010 10:37 pm

As President Obama approaches the end of his administration’s opening chapter, his advisers have begun a backstage debate over Chapter 2, which will be fundamentally different in tone, aspiration and political complexity.

For his first 15 months, Mr. Obama has pounded away at four domestic initiatives. All four — economic stimulus, health care, Wall Street regulations and energy policy — reflected priorities of important Democratic constituencies. The next phase, which Mr. Obama set in motion by appointing a bipartisan panel on reducing the nation’s debt, will not.

Instead of shifting patterns of energy consumption, it will aim to reduce consumption across the economy.

Instead of confronting the unpopular denizens of Wall Street, it will challenge average Americans to accept reduced services or increased taxes — or, probably, both.

The contours of the president’s approach remain undetermined. The deficit panel and external factors, from bond markets to midterm contests for the House and Senate, will play a role. But clues will begin to emerge this fall.

“There will be a significant battle within the administration,” said Robert D. Reischauer, who led the Congressional Budget Office under President Bill Clinton. “We’re going to have a real set of revelations in November, December and January.”

Political advisers are loath to propose large spending cuts or tax increases as Mr. Obama approaches a 2012 re-election campaign. Some economic advisers, including Lawrence H. Summers, director of the National Economic Council, also remain wary of undercutting a fragile recovery in which unemployment remains near 10 percent.

“If there’s a discussion, it’s about the pedal and the brake and how to use them,” said David Axelrod, the president’s political strategist.

A second question is content. Long-term entitlement overhaul, including steps to shore up Social Security by curbing benefits and increasing payroll taxes, represents only part of the equation.

One source of additional deficit reduction, which Mr. Geithner reiterated on NBC’s “Meet the Press” on Sunday, will come from rolling back President George W. Bush’s income tax cuts for those earning more than $250,000 a year. But even Democratic economists sympathetic to the administration insist that raising taxes on affluent Americans alone “won’t work and isn’t a good idea,” as Leonard E. Burman, a public affairs professor at Syracuse University, put it.

That would mean increasing spending cuts, closing loopholes in the existing tax system, or adding a gas or carbon tax, which would serve Mr. Obama’s energy goals.

Or it could mean a value-added tax on goods and services, matching the president’s call for reducing consumption. But any proposed new tax would compound the political difficulty.

Most challenging will be identifying a coalition for action. The enthusiasm of Mr. Obama’s fellow Democrats remains uncertain.

If Republicans recapture the House in November, shared governing responsibility would create the conditions for bipartisan cooperation that led President Clinton and Representative Newt Gingrich to strike welfare-overhaul and budget-balancing deals in the 1990s. But if deficit reduction tracks the priorities of Republicans and their Tea Party allies, tax increases do not.

Plotting a Course

Extending Mr. Bush’s tax cuts for those earning less than $250,000 would require new legislation by year’s end. If Mr. Obama seeks a temporary extension, rather than a permanent one, that will signal his intention to take additional steps relatively soon.

The deficit-reduction panel, led by Erskine B. Bowles, who was chief of staff in the Clinton White House, and Alan K. Simpson, the retired Republican senator from Wyoming, is scheduled to report on Dec. 1. The strength of its recommendations will influence the debate.

If the White House ultimately chooses a tepid stance, Mr. Obama would use 2011 to prove his commitment to paring spending — deferring tax increases until after 2012.

A more aggressive approach would seek quick action on Social Security. Alice M. Rivlin, a former Clinton administration budget director and a member of the deficit-reduction panel, said that would represent a “confidence builder.”

But since any Social Security plan would probably preserve benefits for those nearing retirement, it would not help the administration achieve its goal of reducing the deficit to 3 percent of gross domestic product, from 10 percent, within a decade.

One way to reach that 3 percent goal, by the calculations of Mr. Obama’s economic team: a 5 percent value-added tax, which would generate enough revenue to simultaneously permit the reduction in corporate tax rates Republicans favor.

Some deficit-reduction experts would applaud, but remain skeptical. “How you get from here to there” politically, Mr. Reischauer noted, “is unfathomable.”